Maybe The 787 Isn't Boeing's Biggest Problem
Boeing (BA) delayed the delivery of its first 787 Dreamliner yet again last week (Aug. 27), to first-quarter 2011, meaning the ambitious effort to build a fuel-efficient new wide body plane is more than two years behind schedule. The plane was by now supposed to be boosting Boeing sales, but instead revenue was down 9% year over year.
There are also costly delays in the revival of the 747 program.
Oh well, you might say, the commercial airliner half of Boeing may be a mess. But at least the company has its great weapons and defense unit – its biggest customer is the U.S. government – to fall back on. Or does it?
U.S. defense spending has been growing rapidly in recent years – by nearly 12% annually over the past decade – to support two wars and maintain bases and weapons programs dear to powerful congressmen. That’s one of the reasons – though it would rank behind healthcare spending and tax breaks – the U.S. debt has been climbing dangerously.
With the Iraqi war winding down and President Obama promising to make the build up of Armed Forces in Afghanistan relatively brief, too, there is great pressure to bring down defense spending in the years ahead.
Defense revenue at Boeing has been a little better than flat over the past five years, rising from $31.1 billion in 2005 to $33.7 billion last year. Revenue for the first half of 2010, however, was down 5%, to $16.4 billion, and operating earnings for the defense business fell 13%, to $1.4 billion.
Boeing is in the thick of many new weapon system initiatives, either by itself or through joint ventures, but the push to reduce federal budget deficits will likely be felt strongly among weapons makers.
The commercial airplane operation, by all rights, ought to be booming. Domestic airlines are still in crummy shape, but they account for a tiny portion of Boeing’s sales. It has a backlog of 3,304 planes on order valued at $252 billion, which is more than seven years current revenue for the business.
But one snake-bitten model can haunt the business. The first three 787 test planes – normally test planes are flown and then sold to customers – went through such extensive rework that Boeing decided it couldn’t sell them. That meant adding their cost, $2.7 billion, to the research and development expenses in 2009. That led to an operating loss for the airliner unit last year. Boeing’s profit margins aren’t so lush at Boeing that a setback like that isn’t felt.
Now, the question is this: once the 787 enters commercial service and deliveries of the plane accelerate, will that new revenue return Boeing to a growth pattern, or merely offset declines from a shrinking Pentagon spending?
Disclosure: No Positions
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